At a recent TPSU event for DC plan sponsors held at the University of Georgia, an ERISA attorney on the panel commented on the recent rash of lawsuits against major universities, noting that one of the allegations is that because the 403(b) plans had too many funds, their buying power was compromised, resulting in higher-than-necessary fees.
Having too many fund options in a plan is debilitating in other ways. Behavioral economists note that people are immobilized when given too many choices. According to Columbia professor Sheena Iyengar, plans with fewer funds enjoy better participation and participants make better decisions. UCLA professor Schlomo Benartzi recommends that DC investment lineups include seven to nine options, not including TDFs.
But many plans have bloated investment lineups at least partly because some advisors and providers recommended that more was better in order to comply with ERISA 404c, while other plans are reluctant to remove older options that might have failed their IPS screen. The new lawsuits may give advisors ammunition to help prune these bloated menus and improve outcomes.
Many plans, especially bigger ones or those that include educated professionals, have bloated lineups because the plan sponsors think that they are serving the needs of their more sophisticated employees. Turns out that 90% of all participants would rather delegate the decision to a professional using, for example, TDFs; 9% want to dabble; and 1% want lots of choice, which can be satisfied through a brokerage window.
There have been allegations in the past that providers working with plan sponsors have split up investments unnecessarily to provide more revenue sharing to offset costs. It seems harmless enough at the plan level, but at the individual investor level, not so much.
At the heart of the issue, beyond behavioral best practices and choice architecture, is revenue sharing and the spider web of share classes that recently led Edward Jones to eliminate commissioned mutual funds with from IRAs going forward as a result of the new DOL rule. Like commissions, the target of the new DOL rule, revenue sharing can result in conflicts of interest damaging to the individual investor.
Like excessive fee and self-dealing lawsuits brought in the past, bloated investment lineups resulting in higher fees for investors, not to mention unequal plan subsidies by participants, point out conflicts and issues that the industry needs to address — not just because of the lawsuits or to comply with new rules. Revenue sharing is at the heart of the problem; it should be part of our past, not our future.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
